KRM Risk Management
& Insurance Services

Rental Captive: Association

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Many groups and associations are looking for a better way to battle the high costs of insurance for their members. Some associations are finding the need to develop other insurance alternatives because of state regulations which have determined that self insured trust/pools are no longer an acceptable format to provide coverage. Others are looking for alternatives because the members of self insured pools or trusts may be subject to "point and several liability", meaning if the pool or trust becomes insolvent, the individual member can be assessed for the liability of the entire group. Whatever the reason may be, and because of the increased demand for the structuring and design of alternative workers' compensation programs, KRM Risk Management Services has developed a cost effective Association Rental Captive plan which maintains the integrity of the group or association.

A KRM Rental Captive program can be structured for a group of smaller insureds that want to take advantage of the benefits available to the larger individual risk. This is accomplished through the return of underwriting profit (premium less expenses and losses) in addition to the return of investment income to the association as determined by their own losses. The use of a Third Party Administrator can be utilized to handle the claims and provide loss control, thus giving added control to the association's program. There are no industry restrictions when developing a KRM Association Rental Captive plan. A commitment of $1,000,000 of annualized premium will normally allow for an Association Rental Captive program to be established. The association's premium size is determined by either a small number of large accounts (excess of $50,000) or a large number of small accounts (under $50,000).


Star Insurance Services (SIS) is the insurance broker for an established association of trucking companies. They have suggested that their client, Haulers Trucking Group (HTG) consisting of 30 members, look at an alternative way to handle their workers' compensation coverage due to the current market conditions. With the approval of HTG, Star contacts KRM Risk Management Services to help in structuring a Rental Captive program for the association.

A meeting is set with the association president to discuss the Association Rental Captive concept in addition to other issues such as the association's desire for greater control over their risk exposure and better servicing of claims and loss control. It is explained that the program to be developed by SIS and KRM for the association will contractually guarantee the return of underwriting profit and investment income back to the association. The program also unbundles the claims and loss control services to a Third Party Administrator giving the association increased control of risk management. The KRM Rental Party Administrator addresses the concerns expressed by HTG's president regarding the association's workers' compensation needs. It is agreed that the Haulers' Trucking Group would be an excellent candidate for a KRM Association Rental Captive program and a formal proposal is requested.

Star Insurance Services gathers the pertinent information on each member of HTG, including payroll and loss history for the past five years and forwards a complete submission to KRM Risk Management Services. The submission is processed by KRM and sent to several insurance companies for a fronting quotation of a Rental Captive program.

Grand Insurance Company offers the most attractive quotation. A meeting is set with HTG's president and board members, SIS and KRM Risk Management to discuss the Rental Captive program in detail. The following quote is provided:

PREMIUM                $2,000,000         100%
EXPENSES*              $  800,000          40%
LOSS FUND              $1,200,000          60%
AGGREGATE ATTACHMENT   $1,800,000          90%
POTENTIAL LIABILITY    $  600,000          30%

*EXPENSES include: policy issuance, specific and aggregate excess reinsurance, captive management, taxes, commissions, claims handling and loss control services.

It is explained to HTG that each member of the association is rated individually to determine their own premium and each will receive its own insurance policy. Collectively, HTG's estimated premium of $2,000,000 is used to pay for the program's expenses and losses of the association. A Specific or per Occurrence Stop Loss is established at $250,000 and an Aggregate or Frequency Stop Loss is set at $1,800,000. Excess reinsurance beyond the Specific and Aggregate Stop Loss is provided by the policy issuing carrier, Grand Insurance Company, which limits the effects of both a single large loss and the accumulation of all losses that are incurred by the association. Therefore, the HTG Association Rental Captive is responsible for each loss up to $250,000 and all losses up to $1,800,000 (see Partnership Participation - right).

The members of Haulers Trucking Group pay in their individual premium over the course of the year to the insurance carrier. Program expenses, as shown above, are deducted from the premium and the remainder is ceded to the Rental Captive. The ceded premium establishes the association's Loss Fund from which all losses that fall within their Specific and Aggregate Stop Loss are paid. Ceded funds generate investment income in favor of the association during the claims payout period.

The difference that exists between the Loss Fund and the Aggregate Attachment point is $600,000. This amount is required to be secured and can be accomplished in a variety of ways. One alternative requires each member of the association to provide monthly capital contributions in addition to their regular premium to fund the difference. Security can also be provided by the association itself, through cash contributions and/or a letter of credit. In some cases, the amount of additional funding required is small enough that the association can pledge the investment income that is generated from the loss fund. A final option includes assistance from the broker. By participating in funding the difference with the association or providing the entire security, the broker can then share in any underwriting profit and/or investment income with the association. Haulers Trucking Group decides the best way to secure the difference between the Loss Fund and the Aggregate Attachment is through cash contributions by each member of the association.

All of the ceded premium that is not utilized to pay for losses is contractually guaranteed to be returned to the association as underwriting profit. In addition, the investment income that is accumulated from the Loss Fund is also contractually guaranteed and accrued to the benefit of the association. HTG would receive the underwriting profit and investment income and in turn distribute the profits to the association members based on some predetermined formula (See Program Partnership - left).

Haulers Trucking Group president and board members decide that the KRM Association Rental Captive Program is exactly what they have been looking for and decide to implement the plan effective at the beginning of the month. Prior to that time, with the help of Star Insurance Services, they choose a qualified Third Party Administrator for the handling of claims and also contract with a loss control consulting firm. The program is set in motion for a successful Association Rental Captive program for Haulers Trucking Group.

This sample workers' compensation Association Rental Captive scenario was designed to provide an example of how a program is structured. Taxes and Residual Market Loads (if any) will vary state to state thus effecting the total expense component of each program. There are many options and alternatives available to best address the needs and requirements of each association's objectives. Your KRM representative is available to explain all of the options and your inquiries are welcome.

All names and situations contained within this KRM Rental Captive scenario are fictitious.